Debt Consolidation or Debt Management: Which is Right for You?

April 17, 2020

If you’re overwhelmed with debt, you can start to deal with it by consolidating or managing your debts. A major distinction between the two is that debt consolidation often has a credit requirement, whereas debt management plans usually do not. To help you determine the right strategy for your situation, we compare debt consolidation to debt management.

Find out which approach is best for you based on the amount of debt you have, the type of debt you have, and your credit situation.

debt consolidation loan

Debt consolidation can help you combine several debts into one, preferably with a lower interest rate. There are several loans you can use to consolidate your debt, including a personal loan, a balance transfer credit card, or a home equity loan.

Here are some pros and cons of this approach.

Benefits of a debt consolidation loan

  • You can consolidate just about any type of debt.
  • You may qualify for a better interest rate, which can help you save money.
  • You will have one payment to withhold instead of several.
  • You can borrow money while you pay down your debt.

Disadvantages of a debt consolidation loan

  • If your credit is bad or fair, you may not qualify. If you do, your interest rate could be high.
  • If you keep borrowing while you’re paying off your loan, you could be digging yourself a deeper hole.
  • You may have to pay loan origination fees or balance transfer fees.

Debt management plan

Like a debt consolidation loan, a debt management plan can help you consolidate your debt into one monthly payment, preferably with a lower interest rate.

But instead of paying your new creditor, you will make your payments to a debt counseling agency, who will then send the money to your creditors.

“A debt management plan can typically include most forms of unsecured debt, such as credit cards and low-balance loans,” said Bruce McClary, vice president of marketing for the National Foundation for Credit. Counselling. “But that excludes secured loans like mortgages and car financing.”

Debt management plans typically take three to five years, and you’re usually not allowed to borrow more money until you’re done. In fact, your creditors could suspend or even close your accounts so that you can’t use the credit cards or lines of credit you currently have.

Benefits of a Debt Management Plan

  • It provides enforced discipline to help you avoid borrowing more money while you pay off your existing debt.
  • There is no special credit requirement as you are not applying for a loan.
  • You only have one payment instead of several.
  • You could get a reduction on your interest rates.

Disadvantages of a Debt Management Plan

  • You are required to include all of your debts in your plan, not just the ones that cause you problems.
  • This could hurt your chances of getting credit approval or an apartment because it means you’ve been in financial trouble.
  • Creditors could report that you are not paying as originally agreed, which could damage your credit score.
  • You are limited on the debts you can include.

Debt Consolidation or Debt Management: Which is Right for You?

There is no best approach to paying off debt. What’s important is that you carefully consider each strategy to determine which is best for your situation.

“A debt consolidation loan may be a better option for someone with a high credit score and modest debt,” McClary said. “Debt management plans are most appropriate for those at risk of falling behind on payments from their creditors due to debt balances that have grown beyond the point of being under control.”

Whichever option you choose, it’s essential to address the real issue: why you got into debt in the first place and whether it will happen again.

Honestly examine how you got here and take steps to ensure you don’t repeat your mistakes. For example, if your credit card spending is spiraling out of control, consider getting rid of your credit cards or applying for a lower credit limit to avoid the temptation to overspend.

If you got into debt slowly because you didn’t know where your money was going, consider creating a monthly budget and sticking to it to develop greater spending discipline.

Get help through LendingTree

If the debt burden is too much for you to handle on your own, consider debt relief. It can help you get your finances under control if you’re struggling to manage multiple credit accounts, balances, and other types of debt.

For a fee, a debt relief company can provide additional support to people burdened with debt. This service often includes negotiating with creditors on your behalf to lower monthly payments, rates, and what you owe.

It can also restructure your debts into a single monthly payment plan. Many debt relief companies will also provide advice to help you create a budget that works.

Learn more about how debt relief could help and partner with trusted providers via LendingTree’s Debt Relief Marketplace.

Rebecca Safier contributed to this article.

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